SPX and Dow Update: Is the Top In Place?

Sometimes you just spend too long staring at charts.  Yesterday, on my blog, I warned of the possibility of a fifth wave failure in the NDX and SPX.  After the close Tuesday, I took a much needed break and spent some time with my family, then came back and looked at the charts with fresh eyes.  After reviewing the charts again, I don't think we had a fifth wave failure, I think we had an extended fifth of wave 5, meaning my labels yesterday were off by a degree... what I was labeling as iii yesterday was likely v.

The chart which still seems to be the clearest is the Dow chart.  On this chart, you can see a well-defined 5-wave move off the wave 4 low.  The move exceeded the targets I posted over the weekend by about 40 points, but more importantly, it held below the critical 11,993 level.  With the exception of the 40-point overshoot, it is exactly what I was looking for to end this rally:

Calling tops is always much more difficult than calling bottoms.  But the move on the Dow is perfect for a top -- if my wave count is correct.  This Dow chart shows my preferred count; the SPX chart shows my alternate. 

I was expecting a ramp up to at least backtest the head and shoulders formation, but I'm posting this so late that the futures have already ramped to where it's not going to look like much of a prediction. ;) 

Interesting anecdote: I was talking yesterday with several of my more experienced trader friends, and without exception, all of us were warning that the bears "shouldn't get too excited yet."  Later, I got to thinking: "Isn't this exactly how a top should feel?"  Even bears are afraid to go short, and are looking upwards for "one more leg up" to get short from.  That's a contrarian indicator if ever there was one.

Before the open on Friday, I predicted we would break out of the trading range, then whipsaw back in; and we've done that... but, before I go patting myself on the back too much, I need to state clearly that there is enough room for interpretation in the wave structure that I can't call a top definitively yet.   So what I've done is drawn up a chart with major and minor support/resistance lines to give readers an idea of what to look for on the SPX:

Interestingly, the potential ending diagonal I've been talking about since last Wednesday is still alive and well.  If the ending diagonal is real, we should see another new high.  This is part of what I meant when I said there's still room for interpretation in the charts. 

In a perfect world, the highs will hold, and the Dow chart and my preferred count will ride off into the sunset as the credits roll.  But we all know: this ain't a perfect world.  So it remains to be seen if my call from Friday's pre-open will go down in history as one of the great top calls... or not.  Obviously, any move above the recent highs would indicate that the current wave up is still unfolding.

The Dow chart is also annotated with three key levels to watch.  For complete confirmation of a major trend change, we need to see the blue wave 1 high broken, but there are two other levels that will be very good early warnings: the red trendchannel, and the wave 4 bottom (the wave iv bottom is another, but isn't annotated).  Trade safe!